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Interruptions in domestic supply chains are being felt in every business sector. But, so far, important links in the domestic supply chain—such as manufacturing, distribution and delivery—are still functioning. But if supplies or deliveries are curtailed, businesses will need to adjust their operations accordingly. For some companies, that may mean filling a different need in the marketplace. Others will have to suspend operations and focus on ensuring that they have the inventory, personnel and supplies needed to ramp-up once they have the all-clear.
Understanding Supply and Demand
Shortages of hand sanitizer and toilet paper in the wake of the fast-spreading coronavirus illustrate the complexity of domestic supply chains in the United States. Under normal circumstances, the flow of business supplies and consumer goods is dictated by a predictable ebb and flow of demand.
Supply chains extend way beyond the distributors or trucking companies that move products from supplier to manufacturer to end-user. Sudden spikes in demand, whether for hospital supplies or consumer goods, send shock waves through the entire supply chain. Conversely, when restaurants and hair salons close their doors, wholesale restaurant and beauty-related supply chains are disrupted.
But supply chains aren’t failing, says Professor Brian Gibson, executive director of the Center for Supply Chain Innovation at Auburn University: they’re playing catch-up. “We're experiencing short-term disruptions that happen in any industry, with any product that has an unprecedented spike in demand, like we're seeing right now,” he says.
To help prepare for both existing and future challenges, here are some suggestions that can help businesses that are facing supply chain constraints or are worried about disruptions that could result from lack of inventory or supplies:
Pivot When Possible
Restaurants and their domestic suppliers are a prime example of how an entire industry sector is pivoting. In some places, eat-in dining establishments have shifted their operations to provide pick-up and delivery in lieu of table service. Meanwhile, distilleries and breweries have started making hand sanitizers, and automotive companies are planning to produce ventilators in response to critical shortages.
Of course, restaurants are toward the last link in a supply chain that starts with production and ends when a diner cleans his or her plate. Ironically, disruption at the end of this supply chain is having a ripple effect upstream—on food and beverage suppliers.
While wholesale suppliers are working overtime to deliver food and supplies to grocery stores, other supply chains are grinding to a halt. Mandatory closure of restaurants, for example, is putting pressure on Sysco, a large restaurant supplier. Approximately two-thirds of Sysco’s business is from restaurants, according to a statement on the company's website. In response to decreasing demand in its core restaurant segment, Sysco is pivoting to use its network of warehouses and trucks to fill growing shortages in the retail grocery supply chain.
Keep Cash Flowing
One of the biggest challenges for companies facing supply chain disruptions is cash-flow constraints. Businesses need to ensure that their operations and personnel are aligned with their ability to obtain supplies and keep their doors open. For companies that have been forced to close, it's important to talk with lenders, suppliers and customers in order to reduce the financial impact of closure, and to ensure a smooth path for resuming operations in the future.
A $2 trillion coronavirus stimulus package passed by Congress—along with other federal and state initiatives—is offering some relief for small businesses. Among the provisions in the federal stimulus program are a paycheck protection program that covers payroll costs, paid sick leave, supply chain disruptions, employee salaries, health insurance premiums and mortgage payments. It also provides immediate access to capital for small businesses that have been impacted by COVID-19.
Now that we're in the middle of this, you've got to be very creative and think about your options.
—Professor Brian Gibson, executive director, Center for Supply Chain Innovation at Auburn University
While the stimulus package is designed to help many businesses get back on track after significant disruption, it may be wise to approach the moment as an opportunity to apply strategic, finance-first thinking to supply chain management. Some businesses approach the supply chain strictly from the perspective of supply in, product out, leaving cash-flow efficiencies from working capital management on the table. Examples of these improvements include recalibrating payment schedules with suppliers, or running cash-flow planning exercises on a monthly instead of yearly basis.
How businesses deal with supply chain interruptions depends on where they fit in the overall economic ecosystem. For businesses—such as restaurants—that have been forced to close, the challenge is to conserve capital and line up suppliers that can help them re-open as soon as they get the all-clear. For manufacturers, the challenge is access to the components and raw materials needed to produce whatever they make. That means working with existing suppliers and, in some cases, trying to develop new sourcing options.
Businesses should be looking for alternative suppliers, partnering, and, if possible, even trading any surplus inventory or supplies for items in short supply. “Availability, delivery and quality should influence any new sourcing decisions. It’s absolutely critical to pick up the phone, and talk to your suppliers and your customers,” Gibson says. “Your goal is to really just keep things going. You don't need to stockpile for the next six months.”
Many American producers and distributors of essentials—such as food, medical equipment and cleaning supplies—are scrambling to meet demand with primary or secondary suppliers. “Some companies have gone to Tier 2 suppliers in other parts of Asia or the world, and have simply paid more,” says Sam Polakoff, CEO of Nexterus, a U.S. freight forwarder and customer broker. “The larger the importer, the deeper the pockets, and the more flexibility they can exert. Small- and medium-sized importers have less financial muscle with which to avert the crisis.”
One irony of the current spike in demand for certain products is that it may ultimately lead to an equally sudden drop in demand once the crisis passes. “Industry will catch up, stocks will get replenished,” says Gibson. “When we’re through this crisis, we may see bullwhip effect. That spike in demand will drop dramatically, people are not going to need to buy toilet paper for the next three or four months, and companies will end up with excess inventory.”
Be Prepared for Continued Uncertainty
Business continuity planning and disaster preparedness is most effective when it happens before a company is faced with a crisis. “Now that we're in the middle of this, you've got to be very creative and think about your options,” says Gibson.
Businesses in some industries may just have to wait out the storm. “People are going to focus on the basic necessities,” Gibson says. “Look at the end demand for your product and let that drive your decision-making. Right now, we're not even sure when the recovery period is going to begin, because in some places the actual hurricane hasn't even started yet.”
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